Consumers Hit the Brakes: Is a Spending Slowdown Coming?

Americans may have defied recession warnings last year thanks to their strong spending habits, but that trend might be shifting. Even though inflation remains high and interest rates have hit 20-year peaks, consumers have kept the economy afloat in 2024 so far. However, there are signs that this spending spree might be slowing down.

Economists See a Spending Slowdown

Experts predict a moderation in consumer spending, especially in the latter half of this year. This slowdown is likely due to a few factors. Firstly, disposable income growth (money left after taxes) isn't rising as fast as it used to. Secondly, the job market might be cooling down. Finally, people are still dealing with persistent inflation and higher taxes.

According to Oxford Economics, lower spending in the first quarter reflects these trends. They forecast a gradual slowdown throughout the rest of the year. "The recent data on income and spending is concerning," said Oxford economist Michael Pearce. "It suggests the engine of the economy might be sputtering. While consumer spending won't grind to a halt, we expect it to slow down compared to last year."

Other economic institutions like Wells Fargo and BMO also see a spending slowdown coming. They've revised their growth estimates for consumer spending downward.

Younger and Poorer Consumers Feel the Pinch Most

Recent data shows retail sales barely budged in May, which is not what economists were expecting. Sales in April were even worse than initially reported.

Oxford Economics points out that wealthier households are doing okay for now. Their savings and assets are strong, and their debt burden is manageable. However, younger and poorer Americans didn't have the same chance to build savings during the pandemic. They're relying on a strong job market to maintain their spending habits.

"This explains why they're feeling the pinch," Pearce said. "Some of these consumers who rely on credit cards are increasingly struggling to make payments."

Expect cutbacks in discretionary spending on things like entertainment, dining out, and travel. Big-ticket purchases financed with credit cards might also take a hit. Businesses should prepare for a more cautious consumer, advised LPL Financial economist Jeffrey Roach.

The Fed Keeps a Close Eye on Consumers

The Federal Reserve raised interest rates significantly to fight inflation. Now, they're watching consumer spending closely to see if their strategy is working. The goal is to slow down spending enough to control price increases.

Federal Reserve Governor Adriana Kugler acknowledged that rising interest rates are impacting certain spending categories, especially with pandemic savings running low. "Consumer spending has been holding up for a while, thanks to savings and good wages," Kugler said. "But it slowed noticeably in the first quarter, particularly for goods."

Kugler added that high interest rates are making people think twice about buying things like cars, which often require financing.